Currently, traditional actively managed mutual funds are not listed on Securities Exchanges, or Securities Markets, or “ECNs” (collectively, “Exchanges”), for intra-day, or end of day processing, because (1) Exchanges have traditionally been markets for the intra-day price discovery of their listed securities among their Member Firms or Market Participants (“Member Firms”) and their Member Firms' customers; (2) listed securities have a finite number of shares which are brought and sold on an exchange; open end mutual funds continuously offer shares, for payment, via purchases, and continuously redeem shares, for payment; and (3) traditional mutual funds, whether ‘load’ or ‘no-load’ funds, are purchased or redeemed after the calculation of the fund's NAV, which is usually computed at the end of the day. NAV represents the total assets owned by the fund, less the total liabilities, divided by the number of shares outstanding. In practice, investors may invest in mutual funds by dollar amount (and may receive fractional shares) or number of shares. Share prices are calculated at end-of-day, on the basis of the NAV of the fund after the fund's daily securities transactions have been applied. A typical fund purchase or redemption transaction would take place after calculation of NAV. A customer might place an order for $1,000 of a fund with a $10.00 NAV per share, or order 100 shares of that fund at a cost of $1,000. The majority of fund shares, and monies due, are then cleared and settled through a Fund/Securities Clearing Agent (e.g., Fund/SERV and the National Securities Clearing Corporation (“NSCC”)).
Although specific brokerage firms do provide their customers with daily purchase and redemption services for mutual fund shares through their fund supermarkets or proprietary fund distribution systems, there are various shortcomings with such services. Such firms generally allow only selected funds into their systems and offer either ‘no-load’ funds with ‘no transaction fees’ or ‘transaction fees’, or ‘load’ funds to their customers. Fund supermarkets that offer ‘no transaction fee’ funds to investors generally charge those mutual funds and/or their investment advisers/distributors annual asset-based fees of up to 40 basis points (e.g., 0.0040 bps×$1,000 of assets=$4.00 per year). Often all or a portion of these fees are deducted from a fund's NAV, resulting in a lower investment return for investors than might otherwise be the case. Fund supermarkets that offer ‘transaction fee’ funds generally charge investors higher fees to purchase or redeem ‘no-load’ mutual fund shares than to make regular stock trades. Sales ‘loads’ charged by brokers could cost investors a relatively significant percentage of their fund purchases.